THE TIMES KUWAIT REPORT
The flurry of decisions and plans being announced in recent weeks could be a sign the government is finally waking up to the realization that the economy cannot go on any longer with a ‘business as usual’ model.
The announcement last week of plans to cut some of the lucrative perks and benefits prevailing in the oil-sector — where employees are said to receive salaries that are up to six times higher than that paid to employees in other government entities — is the latest indication of this belated cognizance among authorities of the dire straits the economy is in, and the need to undertake urgent course corrections. The latest moves could also indicate the government’s resolve to rationalize salaries in the public sector, and recalibrate the wide anomalies in pay structure between specific sectors.
Financial constraints and increasing pressure on liquidity has forced the government to acknowledge that unless the prodigious subsidies provided by the state to citizens are rationalized, the bloated public sector trimmed, and other long-pending economic, financial and administrative reforms implemented urgently, the country could inexorably face the prospect of fiscal bankruptcy.
In line with this new awareness, the Council of Ministers announced early last month several belt-tightening measures and public expenditure cuts. As part of these decisions, the Ministry of Commerce and Industry (MoCI) and the Public Authority for Manpower (PAM) were reported to be separately studying various proposals on trimming expenses.
Media reports indicate that the MoCI is examining the possibility of reconciling generous subsidies that it grants to citizens on foods and building material, including whittling down quantities of various food items supplied. For its part, PAM was reviewing the labor support disbursement granted to nationals employed in the private sector, and considering stopping employment support payments to nationals employed in the private sector who are over 60 years.
In addition to austerity measures by ministries, the government has announced curbs on participation by top public officials and delegations in international conferences, symposiums and training sessions, and decided to continue limiting medical treatment abroad for citizens to emergency cases, and only when such medical care is not available locally. These measures notwithstanding, economic analysts believe that without addressing prevailing structural imbalances and implementing serious reforms, the economy will continue free-wheeling to a potential disaster.
Putting this view in another perspective, an article in local media recently asked the poignant rhetorical question, how did Kuwait get to the economic and financial mess it is in today? In answer, the writer places the blame squarely on the government for its ineptness in handling the country’s finances. Underlining that the steps announced to cut expenditure would save only a pittance compared to the government’s own wasteful and opaque financial dealings, the article warned that the austerity measures being planned would only further alienate the public from the authorities.
The article pointed to the government’s continued inability to diversify the economy away from its dependence on oil; its ineptitude in implementing major developmental projects; its lack of transparency in awarding lucrative contracts; and its incompetence in resolving differences with the National Assembly and cooperating with lawmakers to enact development policies, as some of the possible reasons for the country’s current state of affairs. It called for setting up a team of experts to find reasons for Kuwait’s current economic and financial status, and to suggest solutions to remedy this situation.
Although understanding why we are where we are is crucial, it is more important to know how we can get from here to where we want to be. And, setting up yet another team of experts to come up with policies to save the economy, is not what is needed at the moment. The government is fully aware of the situation and what needs to be done, and if this was enough, international entities such as the World Bank and the International Monetary Fund have repeatedly reiterated this to the authorities. In addition, there is a growing caucus of economic pundits locally who never tire of telling the government what to do. Obviously, it is not the lack of knowing what to do, as much as it is an apparent inability to implement meaningful structural reforms that lie at the core of the country’s current problems.
While knowing what to do is important, equally critical is knowing when to do it. Repeated governments in recent years have got this timing wrong and the result has been one failed reform attempt after another. A period of economic downturn, when people are encumbered by job losses, payment cuts and increased financial pressures, is not the right time to be announcing painful economic reforms or subsidy cuts. Unfortunately, it is only during an economic downturn, when international oil prices tend to fall, that the government finds itself in need of additional financing and wakes up to the need for economic and financial reforms. When oil prices swing around and head upwards, and state coffers get refilled, the importance of reforms once again recedes into the background.
The most recent instance of this poor timing was following the precipitous fall in oil prices in mid-2014, the implications of which set in motion a tide of economic downswings across the region, including in Kuwait. Most countries sought to ameliorate the situation early in the crisis by introducing needed fiscal and economic reforms, but Kuwait as usual dawdled on this. And, when it finally realized the need to embrace reforms, initiate subsidy cuts, and introduce other austerity measures, opposition from a public that was already suffering the consequences of the downturn were too significant for the government to overcome.
Nevertheless, the authorities were able to push through subsidy cuts and raise fuel and other utility prices, but these were applicable only to expatriates. The backlash from citizens and their representatives in parliament to the austerity measures soon forced the government to beat a hasty retreat from implementing reforms that impacted citizens. Moreover, later when oil prices once again began to show signs of rising, the government decided to shelve its reform agenda, at least until the next emergency came by. That emergency has now come to pass in the form of the COVID-19 crisis, and, unsurprisingly, reforms are once again back in fashion.
The usual refrain among many people opposed to reforms is that these measures overwhelmingly impact the poor, and benefit only the rich, the crony capitalists, or in the case of Kuwait, the powerful and the merchant-class. However, this is basically the result of a communication failure on the part of policymakers. The inability to convince ordinary people of the need for reforms, or explain it to them in simple terms that makes sense to them, without resorting to financial jargon and hyperbole, is perhaps one reason why reforms are so unpalatable to the general public.
Experts agree that people are also often not fully aware of what economic reforms actually entail. If reforms mean reduction in subsidies that could lead to them having to pay extra for essential items and for public goods and services, it is quite likely to be opposed, especially by those who rely on these subsidies, or would now have to make cuts in other expenses in order to afford the earlier subsidized goods and services. However, if the government also concurrently announces support measures for those in real need of subsidies, or clearly explains how removing subsidies could lead to offering better and more efficient public services, the opposition to these reforms could probably be less intense.
Similarly, when people are informed that automation or opening up the market to competition could mean they would lose their jobs, it is understandable why they would oppose these measures.
On the other hand, if while declaring opening up of the market to competition, the authorities also simultaneously announce initiatives aimed at capacity building and retraining for those likely to lose jobs, or explain that more competition could lead to more jobs and better employment opportunities, there is no reason to believe that reforms would be so universally opposed. Evidently, it is not enough to know what to do, and when to do it, there is also a need to explain the reforms to the public in a way that makes sense to them and draws their support.
An example of this poor communication in Kuwait is where the government has long sought to introduce administrative reforms in a bid to rationalize salaries in the public sector. In March, while urging radical reforms, Finance Minister Khalifa Hamada conceded that public salaries and subsidies constitute more than 71 percent of the state’s total spending, and that this was clearly unsustainable. But no finance minister has so far explained to the public that the planned salary restructuring is likely to impact only a small fraction of the government employees who are already in the upper quintile of the population.
This coterie of public officials, who usually draw unrealistically high salaries that are often not commensurate with their productivity, efficiency or merit, has in the past been able to draw voluble opposition to these reforms from their lawmakers and from other unwitting public sector workers. They have so far successfully thwarted all government reform attempts that impinge on their lucrative salaries and perks, or their job security. Explaining reforms should be one reform that policymakers need to adopt in their strategy.
Structural reforms are obviously essential for the country to move forward, but looking ahead, globalisation, digitalisation, demographics and environmental degradation are likely to be the key factors in shaping economic developments in the coming years. A report last week on the country’s demographic structure by the National Bank of Kuwait (NBK), based on latest population data from the Public Authority for Civil Information (PACI), shows that the country’s population decreased by 3.1 percent since the start of 2020 to reach 4.62 million in the first half of 2021. The fall by 2.2 percent in 2020 was the sharpest decline on an annual basis in nearly 30 years.
The drop in population has been attributed to the economic repercussions from the COVID-19 crisis that forced a large number of expatriates to leave the country due to job losses. While the fall in expat numbers is regarded as a temporary phase and the population numbers are likely to pick up once the economy begins to regain luster, more significant was another piece of demographic data. The NBK report also showed that despite a slowdown in the growth rate of the number of Kuwaiti citizens under the age of 15, this segment of the population, which numbers about 493,000 citizens, still accounts for more than a third of the population of Kuwaiti citizens.
This young cohort of the population has the potential to provide a demographic boost to the country in the years ahead, but only if it is properly leveraged, and correctly channeled early on, For the country to realize long-term economic and social dividends, the authorities will need to invest heavily in young people now; in their health, education and training so that they have the capabilities to seize the opportunities presented by new technologies and systems that will fuel the 21st century. The caveat to this is that unless the fleeting demographic dividend offered by a sizable young population is seized and realized, this dividend could soon become a demographic liability for the country.
To meet challenges and grasp opportunities presented by future buoyant potentials, the government will first have to prioritize and implement appropriate structural reforms. The fact that in the past attempts at reforms have generally failed — as it see-sawed between being a priority for the government in bad times and being ignored during good times — should not deter policymakers from resolutely and urgently implementing planned reforms. However, to do this successfully, the government, lawmakers and citizens need to wake up and learn to work cohesively, to rethink old assumptions, and find new pathways to progress and development.
Economic pundits famed for their hind-sight are known to judge failed reforms indignantly, but this is only to be expected of their tribe. More importantly, it is also likely to be condemned bitterly by those who suffer as a result of these failed reforms — the poor, or in Kuwait’s case the ‘less rich’ citizens, the unemployed and the unemployable.
But prospects of failure and its impacts should not be a reason for the government to shy away from implementing structural reforms. If it is any consolation, to quote from the English poet Robert Louis Stevenson, “Life is not designed to minister to a man’s vanity… When the time comes that he should go, there need be few illusions left about himself. ‘Here lies one who meant well, tried a little, failed much: surely that may be his epitaph, of which he need not be ashamed’.”
In other words, there is nothing to be ashamed of in having tried and failed, knowing that all along you meant well. Let us hope this thought prevails as the government goes through its latest iteration of reforms.
